Home loans are usually taken for a long duration, roughly 20-25 years. During this tenure market conditions tend to fluctuate which may alter interest rates and other factors. Due to these fluctuations, borrowers may want to restructure their existing loan in line with the economy. This is where the concept of home loan refinancing steps in.
In simple terms, home loan refinancing is changing the terms and conditions of your existing loan. You can essentially get a new loan tenure, revised rate of interest or shift from a fixed interest rate to a floating rate and vice-versa. You can either visit your existing bank to change the terms and conditions or approach a different bank for home loan refinancing.
Sometimes you may have excess funds and may wish to clear the home loan faster, thus reducing the tenure. Simultaneously you may want to increase the tenure of the loan if you want to pay lower EMI’s every month. This requires the loan to be revised and restructured and involves certain costs by the banks for the same.
Lets have a look at a two costs that a borrower should be aware of during home loan refinancing:
1). Exit Fee: Banks in India charge a pre-payment penalty of around 2%-5% of the outstanding principle amount if the borrower decides to refinance the home loan from a different bank. The banks levy this fee on the borrower for the loss of interest it had earlier accounted for.
2). Processing Fee: Once you have decided to refinance your home loan with a new bank and pay the existing bank off, the new bank will charge you a processing fee which is roughly 0.5%-1% of the principal amount.
Refinancing with the same bank
When you have decided to get your home loan refinanced, you have to choose between the existing bank and a new bank. The existing bank will have to forgo some of its earnings and may try to give out as little as possible Thus existing banks may be reluctant to alter the terms and conditions, which will tempt you to shift to a new bank to refinance your loan.
Refinancing with a new bank
If you decide to refinance your loan with a new bank, you will have to take the approval of the existing bank and present a No Objection Certificate (NOC) to the new bank.
When you shift to another bank you will have to go through all the procedures again like the way you did while applying for the original loan.
You must factor in all the costs before applying for a refinance of your existing loan. Weigh the options and see if you save more in the long run and then take the final call.